DATE

Steve Saretsky -

Bank of Canada Governor, Tiff Macklem, delivered some final comments this week at a keynote speech in BC. He didn’t mince words following the fastest rate hiking cycle in recent history. “There’s no question that if you bought a house near the peak, you took a variable rate mortgage with a high loan to income ratio you’re really feeling the squeeze of higher interest rates.” No doubt. Here’s our real life example to refresh your memory. 1. $500,000 mortgage, 25 year amortization, 1.5% mortgage rate = $2000/month $500,0000 mortgage, 25 year amortization, 5.5% mortgage rate = $3052/ month 2. $1,000,000 mortgage, 25 year amortization, 1.5% mortgage rate = $3997/ month $1,000,0000 mortgage, 25 year amortization, 5.5% mortgage rate = $6104/ month “Look, the housing market was unsustainably hot for the last couple of years, part of getting the economy into better balance is getting the housing market in better balance.” Macklem concluded. Have no fear, the housing market is definitely in better balance, at least if you’re a buyer. National housing figures released last week paint a rather drastic turn of events in the nations housing market. Home sales fell 39% year-over-year in November. The 30,135 sales reported across the

Steve Saretsky -

To no surprise, the Bank of Canada raised rates again this past week. Another 50bps. Interest rates are now up a whopping 400bps since this tightening cycle began in March. According to Macquarie Research, this is the sharpest calendar year of rate hikes on record going back to 1936. The most common rebuttal you see circulating online is that rates are still low from a historical basis. While that may be true it is an irrelevant point if you’re not also considering the levels of debt. I often hear people comparing todays rate hiking cycle to that of the 1980s. The Bank of Canada had rates as high as 18% in 1981 so we have a lot more room to go! Except household debt to GDP levels were also around 50% in the early 80’s, today household debt to GDP sits at nearly 110%. Source: Acorn Macro, Richard Dias You could also buy a single family house on one income at roughly two to three times your annual salary in the 1980’s. Today that is obviously not the case. The recent 400bps move in interest rates is blowing up highly indebted household balance sheets. Let’s look at a few examples.

Steve Saretsky -

Lots to unpack this week so let’s dive in. Sales figures for the month of November are making for more negative headlines, as they probably should. There is little optimism in the latest data. Greater Vancouver home sales were down 53% on a year-over-year basis. Over the past two decades there have only been two slower months of November (2008 and 2018). Prices are still trickling lower, despite inventory levels remaining surprisingly low. It’s a similar story in the GTA, home sales fell 54% from last year, and were the lowest since November 2008. A four hundred basis point rise in mortgage rates is going about as well as one would expect, and we’re about to get another Bank of Canada rate hike this Wednesday. The good news is this is probably the end of the line for the Bank of Canada, at least that’s my view. Macklem will seal the deal with another 25bps and bring this rate hike cycle to a close at 4%. A survey of Bloomberg economists seem to think the same, suggesting Governor Tiff Macklem can comfortably leave their benchmark rate as much as 100 basis points lower than the Fed. I’m not going to

Steve Saretsky -

Last week we highlighted some recent data from Desjardins which noted that nearly every borrower who took out a fixed payment variable rate mortgage during the pandemic now owes more in interest than their original fixed payment. Trigger rates galore. It appears the Bank of Canada is finally coming around to the same conclusion. In a research paper released this past week, the Bank of Canada noted that about 50% of all variable-rate mortgages with fixed payments (not just pandemic borrowers) have reached their trigger rate. This represents about 13% of all mortgages outstanding. Let’s not forget that 13% figure does not include variable rate mortgages with FLOATING payments. At the end of the day it is very simple, you can not raise borrowing costs by 400bps in less than a year on top of a highly indebted household sector without experiencing significant financial stress. There’s a reason the Bank of Canada has been increasingly mentioning financial stability concerns in recent months. Don’t be surprised to see a smaller 25bps rate hike at the December 07 announcement. In a recent poll from Nanos Research, 47% of households say their finances have worsened over the past year. This is the highest

Steve Saretsky -

No bottom yet. Data published by CREA last week showed national house prices slid lower in the month of October, dropping 1.2% month-over-month. The national home price index is now down 15% since peaking in March earlier this year, the steepest correction on record since the index was created in 2005. Just for comparison sake, the previous record was a 9% peak to trough decline in 2008-09. The index measures the price of a “typical home” in Canada. In other words, the typical home across Canada has declined by $132,900 this year. Of course all Real Estate markets are hyper-local, and the declines are not spread out evenly. However, other than Calgary, most major metros are enduring a real correction. Source: RBC We should not underestimate the ramifications of a 15% price correction to the national home price index. Real Estate transactions and mortgage volumes have been slashed nearly in half. It is survival of the fittest now. The industry is going to go through a significant restructuring after a blistering hot bull market sowed the seeds of its own demise. Two things got my attention this week: Properly, a tech startup/ real estate brokerage has announced significant job cuts.

Steve Saretsky -

The Bank of Canada raised rates by another 50bps this past week, pushing prime rate to 5.95% and inflicting more pain on variable rate mortgage holders. We’ll circle back to that in a second. What’s important to note here is markets were fully pricing in a 75bps rate hike from the Bank of Canada and yet they only delivered 50. Tiff had a layup and he didn’t take it. But why? For the first time in awhile, the Bank of Canada has now flagged financial stability concerns. From the October Monetary Policy Report: “As monetary policy tightens in many countries, long-standing global financial vulnerabilities could amplify the impacts on the global economy. Many countries have high levels of sovereign, non-financial corporate and household debt. Some funding markets have become more fragile due to lower levels of liquidity. An abrupt repricing of risk could trigger funding strains for higher-risk borrowers and a prolonged period of deleveraging. The result could lead to a more severe global slowdown and lower commodity prices. The Canadian economy could be affected through weaker foreign demand, lower terms of trade and spillovers into its financial system. The resulting tighter financial conditions and higher unemployment could undermine homebuyer

Steve Saretsky -

Inflation in Canada slowed less than expected, growing by 6.9% year-over-year in September, economist expectations were at 6.7%. A small miss that will have big ramifications. Markets immediately repriced Bank of Canada rate hike odds for October 26th, now expecting another jumbo 75bps rate hike. In other words, the beatings will continue until morale improves. Not to beat a dead horse, but the CPI index is a lagging indicator. Per Stats Canada, one of the reasons inflation didn’t come down as much as expected is because furniture and car prices accelerated higher. Really? Every furniture store you go into these days is slashing prices and cutting their workforce. Let’s not forget the comments from the CEO of Restoration Hardware in September, “Anybody who thinks we’re not in a recession is crazy,” Friedman told analysts. “The housing market is in a recession, and it’s just getting started. So it’s probably going to be a difficult 12 to 18 months in our industry.” They say stocks have information in their price. Here’s Restoration Hardware, taken to the woodshed, down 55% year to date. No need for a new couch when nobody’s moving. As the housing market goes so do the things tied

Steve Saretsky -

The closely watched US Consumer price index surprised to the upside last week. Consumer prices rose by 0.4% in September, and while inflation is decelerating, down to 8.2% year-over-year, it remains extremely elevated. The recent advance was broad based, with Shelter, food and medical care being the largest contributors. Shelter inflation is surging, at least according to the Feds models. Yet everyone knows the housing market is rolling over. House prices are now falling on a month-over-month basis for the first time since 2012. Meanwhile, according to three of the largest residential REITS in the United States, rents have peaked and in some cases are now falling! AvalonBay Communities: “We’ve assumed that [rents] will decline, just at a more modest pace than pre-COVID periods would typically dictate.” Essex Property Trust: “What we are expecting is normal seasonality. We do have headwinds from tougher year-over-year comps. Last year, in the first half, our blended lease rate was -4%. But in the second half, it surged to about +13.25%. That’s the tough year-over-year comp.” Equity Residential: “We assume we’re going to have rents peak somewhere in this first or second week of August and then have a normal kind of trail off

Steve Saretsky -

More housing data trickling out of Canada’s two largest major metros. Greater Vancouver home sales fell 46% year-over-year. It was one of the slowest Septembers on record, other than 2008, 2012, and 2018. Prices are still moving lower, albeit mostly in suburban markets which saw excessive price gains during the pandemic. For example, the median sales price of a detached home in the Fraser Valley inflated by $800,000 from February 2020 to February 2022. Since peaking, prices have dropped a whopping $455,000, giving back a good chunk its initial gains. What’s perhaps even more interesting though is that new listings are plummeting. New listings in Greater Vancouver fell to 20 year lows for the month of September. It appears both buyers and sellers don’t like todays prices. Both are refusing to transact at today’s prices. Negotiations have become hostile. A similar story is playing out in the GTA. Both Toronto home sales and new listings plummeted to 20 year lows in the month of September! Prices are inching lower but at a much slower pace with sellers pulling inventory off the market. Many sellers are choosing to rent out their properties instead, or planning to try selling again in the

Steve Saretsky -

Another massive week in the rates market with the US Federal Reserve jacking rates up another 75bps. While this was expected, it was the stark comments from Jerome Powell that really shook markets. Powell basically, in a polite way, said Americans need to endure some economic pain, including job loss, to slow demand and get inflation down. Furthermore, he wants to see a correction in the housing market. “What we need is supply and demand to get better aligned so house prices go up at a reasonable level, at a reasonable pace, so that people can afford houses again, so we probably in the housing market need to go through a correction to get back to that place.” How much of a correction does the Fed need to see? In the US, Home sales have declined for seven months in a row. New family home sales are down 30% year-over-year. Source: Global Macro Investor Pending home sales are approaching pandemic lows. Source: Global Macro Investor The Monthly Supply of New Homes just exploded to 10.9 months. Builders are screwed and prices are heading lower. Source: Global Macro Investor The wheels are in motion for a deepening housing correction. This is

Steve Saretsky -

Higher interest rates continue to slow the nations housing market. National home sales, as reported by CREA, fell 25% year-over-year in the month of August. It was also the sixth consecutive monthly decline in home sales. While new listings remain weak as sellers resist selling at recent valuations, inventory is still climbing and prices continue to move lower. The national home price index fell another 1.6% month-over-month in August. The index measures the price of a “typical home” and suggests the typical home has dropped by $108,000 since peaking in March. National prices have now declined 12%, the steepest correction since the index was created in 2005. Of course, there is no national housing market per se, but from a larger macro perspective this kind of move is significant. House prices are dropping across the nation, here’s how the correction looks year to date: Greater Toronto Area -15% Ottawa -11% Greater Vancouver -7% Montreal -6% Calgary -2% Remember, this exactly what the Bank of Canada wanted. Housing is the economy and it’s rolling over, hopefully enough to bring inflation down with it. Per Stats Canada, households lost nearly $1 trillion of net worth in the second quarter as house prices

Steve Saretsky -

As expected, the Bank of Canada raised interest rates another 75bps this past week. The overnight rate is now up a whopping 300bps year to date, the quickest tightening of monetary policy on a percentage basis since the 1980’s. While there was no additional commentary from BoC Governor Tiff Macklem, the official press release notes, “Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further.” For what it’s worth, markets are still expecting the Bank of Canada to lift rates to 3.75% before hitting pause. So, assuming they are right we have another 50bps to go. However, even if they stopped here, the damage is already done, let’s assess. The banks prime rate is now at 5.45%, which as per the always brilliant Rob Mclister, implies the following: Payments on a run-of-the-mill prime – 1.00% adjustable rate mortgage (ARM) will now be about $154 higher per month—per $100,000 borrowed—compared to March 1 (before the BoC started this campaign). Interest-only HELOC payments will leap by about $63 a month, per $100,000 borrowed. The lowest nationally available stress test rates have risen to: 6.59% uninsured (a 4.59% one-year fixed from Manulife Bank)

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The Canadian Economy

Steve Saretsky -

Bank of Canada Governor, Tiff Macklem, delivered some final comments this week at a keynote speech in BC. He didn’t mince words following the fastest rate hiking cycle in recent history. “There’s no question that if you bought a house near the peak, you took a variable rate mortgage with...

Steve Saretsky -

To no surprise, the Bank of Canada raised rates again this past week. Another 50bps. Interest rates are now up a whopping 400bps since this tightening cycle began in March. According to Macquarie Research, this is the sharpest calendar year of rate hikes on record going back to 1936. The...

Steve Saretsky -

Lots to unpack this week so let’s dive in. Sales figures for the month of November are making for more negative headlines, as they probably should. There is little optimism in the latest data. Greater Vancouver home sales were down 53% on a year-over-year basis. Over the past two decades...

Steve Saretsky -

Last week we highlighted some recent data from Desjardins which noted that nearly every borrower who took out a fixed payment variable rate mortgage during the pandemic now owes more in interest than their original fixed payment. Trigger rates galore. It appears the Bank of Canada is finally coming around...

Steve Saretsky -

No bottom yet. Data published by CREA last week showed national house prices slid lower in the month of October, dropping 1.2% month-over-month. The national home price index is now down 15% since peaking in March earlier this year, the steepest correction on record since the index was created in...

Steve Saretsky -

The Bank of Canada raised rates by another 50bps this past week, pushing prime rate to 5.95% and inflicting more pain on variable rate mortgage holders. We’ll circle back to that in a second. What’s important to note here is markets were fully pricing in a 75bps rate hike from...

Steve Saretsky -

Inflation in Canada slowed less than expected, growing by 6.9% year-over-year in September, economist expectations were at 6.7%. A small miss that will have big ramifications. Markets immediately repriced Bank of Canada rate hike odds for October 26th, now expecting another jumbo 75bps rate hike. In other words, the beatings...

Steve Saretsky -

The closely watched US Consumer price index surprised to the upside last week. Consumer prices rose by 0.4% in September, and while inflation is decelerating, down to 8.2% year-over-year, it remains extremely elevated. The recent advance was broad based, with Shelter, food and medical care being the largest contributors. Shelter...

Steve Saretsky -

More housing data trickling out of Canada’s two largest major metros. Greater Vancouver home sales fell 46% year-over-year. It was one of the slowest Septembers on record, other than 2008, 2012, and 2018. Prices are still moving lower, albeit mostly in suburban markets which saw excessive price gains during the...

Steve Saretsky -

Another massive week in the rates market with the US Federal Reserve jacking rates up another 75bps. While this was expected, it was the stark comments from Jerome Powell that really shook markets. Powell basically, in a polite way, said Americans need to endure some economic pain, including job loss,...

Steve Saretsky -

Higher interest rates continue to slow the nations housing market. National home sales, as reported by CREA, fell 25% year-over-year in the month of August. It was also the sixth consecutive monthly decline in home sales. While new listings remain weak as sellers resist selling at recent valuations, inventory is...

Steve Saretsky -

As expected, the Bank of Canada raised interest rates another 75bps this past week. The overnight rate is now up a whopping 300bps year to date, the quickest tightening of monetary policy on a percentage basis since the 1980’s. While there was no additional commentary from BoC Governor Tiff Macklem,...

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The Saretsky Report. December 2022